Microsoft's Morphing Business Model

When I take a look down the road at what's next for Microsoft, I typically focus on the company's products and people. But there's an equally important aspect when considering the company's future: its business model.

Until recently, that business model was straightforward and simple: Sell lots of software at a lower cost than the competitors. Some cynics might tack on to that: Explore ways to force partners and customers to buy more of your apps by bundling them and thereby blocking out competitors. The latter is a practice antitrust watchdogs have done their best to thwart in recent years.

With the Web now one of the primary ways users find, try out and buy their software and services, Microsoft's tried-and-true business model is morphing into multiple business models.

Three years ago, Microsoft's Chief Software Architect Ray Ozzie foreshadowed this change in his strategy opus with a memo entitled "The Internet Services Disruption." In that Oct. 28, 2005, memo Ozzie observed:

"Most challenging and promising to our business is that a new business model has emerged in the form of advertising-supported services and software. This model has the potential to fundamentally impact how we and other developers build, deliver and monetize innovations. No one yet knows what kind of software and in which markets this model will be embraced, and there is tremendous revenue potential in those where it ultimately is."

Microsoft has been juggling a number of business models for months -- if not years -- primarily through pilot programs and experiments. In 2009, however, these limited trials are looking like they'll start to become permanent pieces of the company's repertoire. Here are some examples:

Via FlexGo and the Office Prepaid Trial programs, Microsoft's Unlimited Potential Group has been offering users in developing and emerging markets "pay-as-you-go" options for their software. Microsoft applied for a patent for pay-as-you-go (although the application was subsequently rejected), which may mean the company is going to allow customers in all countries to start trying or buying software and services this way.

With Microsoft Works, Redmond has been dabbling in free, ad-funded options for users of its low-end office suite. With Office 14's new Web apps -- Web-based versions of PowerPoint, Word and Excel -- Microsoft is planning to make ads the default way that these applications will be monetized, at least for home use. Businesses, on the other hand, will have to pony up an unspecified amount to "subscribe" to the Office 14 Web apps.

Like Amazon and Google, Microsoft is starting to offer third-party and corporate developers the option of hosting their apps in the Microsoft Azure cloud and using Microsoft cloud-based services to build these apps-all for a monthly fee.

Of all of these models, the one Ozzie and Microsoft CEO Steve Ballmer are the most focused on is advertising. But that's a catch-22 for the company, given its lagging position in the search and online-advertising markets. As blogger Danny Sullivan noted recently in his "Tough Love for Microsoft Search" talk, Microsoft's bid for Yahoo! wasn't about people or technology. It was about growing the 'Softies' monetizable advertising base. But Microsoft has yet to land even a search deal with its former take-over target.

Being the low-cost, high-volume software provider isn't enough any more. Do you think the 'Softies can make the transition from one primary business model to managing and -- if they have their way -- monopolizing multiple business models this year and into the future?

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Mary Jo Foley is editor of the ZDNet "All About Microsoft" blog and has been covering Microsoft for about two decades. She's the author of "Microsoft 2.0" (John Wiley & Sons, 2008), which examines what's next for Microsoft in the post-Gates era.